Why the Tobin tax could be Gordon Brown's legacy

The fact that very rich people don't like paying a tax is not a good reason to exempt them from it.

But this argument – they would try to avoid it, so there's no point trying – has been much rehearsed recently. It was widely deployed against the levy on bankers' bonuses announced in the pre-budget report. It has come up again in opposition to the idea of a "Tobin tax", promoted recently by Gordon Brown and endorsed at a summit of EU leaders last week.

Of the two measures, the bonus raid is simpler. But the Tobin tax, a levy on global financial transactions, is more promising as a means to raise revenue and discourage reckless speculation. For that reason, it attracts special hostility from the City.

The appeal for governments is clear. The trade in currencies, debt and derivatives is worth billions of pounds every day. Some of that activity is needed to keep markets liquid, easing the flow of credit to businesses and consumers. But a lot is pure casino and, as the credit crunch proved, any trickle-down benefits to the society that hosts it are outweighed by the risk.

The bets all turned out to be underwritten by government. So the players should pay a premium to the taxman. A small levy on each transaction will not impoverish individual traders but could still raise tens of billions in revenue. As the Nobel laureate economist Paul Krugman put it recently: "What's not to like?"

A lot, apparently, if you are a banker. The first line of objection is practical: it is too complicated; trades are too widely dispersed; traders would switch to activities not covered by the tax or devise new ones.

It is true that the tax would require international co-ordination but, as recent G20 summits have shown, that can be achieved with sufficient political will. Besides, global markets are actually quite centralised and becoming more so with plans afoot to bring the trade in more exotic assets into registered exchanges. Governments collect taxes on activities just as disparate and complex every day.

The second line of objection is theoretical: global financial markets are the life blood of efficient capitalism; taxes drain liquidity and so cut off the money flow to ordinary people. By extension, goes this argument, a tax on finance will chase the precious money-makers away to more accommodating jurisdictions.

That would be a plausible line if the enormous increase in the volumes of capital flows in the boom years led to an equivalent increase in wealth outside the financial system. But it didn't. Some of the money was passed on to consumers, but as loans, which they still have to repay, while also paying in taxes to cover the bankers' debts. The much lionised "wealth creators" of the City hoarded the real profits for themselves.

It isn't even true that the City pays its way in other taxes. Revenue from the financial sector in the last five years of the boom amounted to around £200bn. The cost of the bailout is currently estimated at £850bn. The City's implosion left a crater in the national finances – a structural deficit necessitating higher taxes and fewer public services for all.

So it is unclear why financiers' reluctance to pay a Tobin tax should count as a reason not to charge them. There are practical issues of implementation, but they are surmountable.

The real obstacle is the endurance of the ideology that believes in deregulated, untaxed, ever-expanding global capital markets as an end in themselves. It is clear from the past two years who wins and who loses when such a creed is allowed to dictate government policy. It is also clear, from his endorsement of a Tobin tax, that Mr Brown is no longer taking that dictation.

The conversion has probably come too late in domestic political terms. It is derided by many Conservatives as cynical City-bashing ahead of an election. But if Mr Brown secures global agreement on a Tobin tax, his motives are irrelevant. The policy is a good one; it would make a worthy legacy.